A Simple Checklist for Loyalty Program Financial Reporting


As the year draws to a close, people look forward to time with family, music, winter weather, and holiday parties. Accountants, however, know that the real joy of the holiday season begins after they’ve closed their year-end books.

The recent revisions to the rules for loyalty program revenue recognition have put this process under the spotlight and made accounting for loyalty programs more challenging.

Fortunately, there’s an easy-to-follow checklist that will help your accounting department ensure the requirements of ASC 606 and IFRS 15 are met.

1. Validate data

 It’s essential to have accurate data and to use analytics strategies to your advantage. To achieve this, cross-reference individual transactional data against the cumulative point balance employed in your liability estimate.

Generally speaking, there should be consistency between earlier period trends. For example, similar months or times of the year should demonstrate similar point volumes, unless something anomalous has occurred.

2. Allocate redemptions to earned points

 To get an accurate breakage forecast, you must ensure that your allocations for redemptions are commensurate with the amount of points earned by members.

Accurate breakage estimates require correctly allocating redemptions to actual point earnings.
The simplest and most effective approach to this is known as FIFO, or First In, First Out. The FIFO method prescribes that redemptions be attached to the earliest points earned by a member that are still outstanding.
However, there is no hard and fast rule about how point allocation should be carried out and not all programs will benefit from FIFO. Make sure to use the method that is most congruent with your company’s process for accounting for loyalty programs.

3. Update breakage and fair value estimates

Simply stated, the more reliable your breakage and fair value per point estimates are, the more effective your loyalty program will be.

Accurate breakage and fair value estimates in combination prevent your company from deferring the wrong amount of revenue, and reduce the likelihood of the undesirable consequences of doing so.

By multiplying the cost per point by the percentage of outstanding points that will ultimately get redeemed, your accounting team will arrive at the correct amount that they must defer in order to adequately absorb any incoming loyalty program liability. Remember: deferring can lead to revenue becoming “stuck,” and doing the opposite can result in negative impacts to income statements.

The bottom line

 Using crystal clear data, correct allocations, and accurate breakage estimates, your company can bring in the new year with optimized, profit-enhancing financial statements and revenue reports that are in complete compliance with the new accounting standards.